Emergency situation did not substantially impact economy in first quarter

Bank of Estonia coat of arms.
Bank of Estonia coat of arms. Source: Siim Lõvi /ERR

According to the financial account statistics published by the Bank of Estonia on Thursday, the emergency situation did not substantially impact the Estonian economy in the first quarter (January - March).

Net lending of the total economy was €201 million in the first quarter, while the general government and financial sector were net borrowers, it appears from the central bank's statistics.

Estonian household debt rose 0.9 percent to €10.65 billion over the quarter, and compared to the same period last year, the increase was 5.9 percent. Household debt accounts for 38 percent of gross domestic product (GDP) in the last four quarters. Households continued to be net lenders in the first quarter, in the amount of €471 million.

Households' financial assets decreased by 1.5 percent. Equity securities, life insurance and second pillar pension insurance reserves lost the most value. At the same time, compared to the first quarter of 2019, life and pension insurance assets have grown by more than 5 percent.

General government debt increased by 6.6 percent quarter-on-quarter and by 21.1 percent year-on-year to €2.49 billion. The sector's net borrowing amounted to €391 million. General government consolidated debt accounted for 8.9 percent of GDP in the last four quarters.

Central government debt grew by 9.5 percent over the quarter and by 26.4 percent over the last four quarters. At the same time, the central government issued bonds worth €200 million in the first quarter.

The debt of non-financial corporations increased by 0.1 percent quarter-on-quarter and by 2.1 percent year-on-year to €19.92 billion. The volume of corporate financial assets and liabilities remained at the level of the fourth quarter of 2019. The share of liquid assets in the total volume of financial assets is 28.9 percent.

Although corporate debt remained broadly unchanged in the first quarter, it has grown year-on-year, accounting for 71 percent of GDP in the last four quarters. The market value of traded shares fell 22.4 percent in the first quarter. However, despite the emergency situation, the profitability of companies has not decreased.

In the first quarter, financial institutions were net lenders in the amount of 63 million euros. The sector's resources, which include deposits, loans, debt securities issued and the technical reserves of the insurance of insurers, exceeded GDP in the last four quarters by 1.6 times. The loan portfolio remained at the level of the fourth quarter of 2019, but has grown by 2 percent over the year.

Estonia's export has suffered less than EU exports on average

The blow that exports have taken in different member states of the European Union rather is smaller in Estonia's case than with EU member states on the average, Kaspar Oja, economist at the Bank of Estonia, writes in the blog of the central bank. 

"Statistics Estonia announced last week that in May exports contracted by a quarter. Against the backdrop of easing of local coronavirus restrictions and recovery of domestic demand, the decline in exports is very harsh, but it isn't so much when viewed against the backdrop of what is happening elsewhere in the world," Oja said.

The economist pointed out that even though in Estonia the rates of infection have declined and restrictions have been lifted, restrictions aimed at stopping the spread of the virus continue to be in place in the target markets for Estonia's exports, which is undermining the business of Estonian exporting companies. 

"Exports by the industrial sector of countries of Northern Europe declined by less in April than in the rest of Europe. The decline in May here was similar to that of April, however for many countries data for May are not public yet," Oja said.

The economist said he was only looking at figures concerning the industrial sector, not total export, as data on the industrial sector has mirrored the wellbeing of Estonian businesses better in the past than data on exports in general, which contain transactions whose impact on Estonia is small.    

Oja observed that the severity of virus-related restrictions on the target markets for a country's exports at least in part explains the rates of decline in exports seen in different countries.

"The stricter were the restrictions on the target markets for a country's exports, the steeper was the decline in industrial exports in May," Oja said.

He added, however, that in addition to the restrictions valid on the target markets the performance of Estonian businesses is undermined also by restrictions on the markets for raw materials and at the partners of our target markets.  

"For instance, while Sweden is famous for its sparse restrictions, when economic activity decelerates on the target markets of Sweden this affects both Sweden as well as indirectly also the countries that export to Sweden," Oja said.

Oja said that, consequently, the receding of the infection and easing of restrictions within Estonia helps the companies that are working for the domestic market. However, since in many foreign countries the health situation continues to be poor, the activity of Estonian businesses active on other markets is more restricted.  

The economist also observed that during the peak of the emergency situation the restrictions within Estonia were stricter than at our trading partners on the average. Besides, the easing of restrictions has been significantly slower at our trading partners than in Estonia. Globally, the easing of restrictions has been slower still, which mirrors the slow receding of the infection in general.  

Therefore it can be presumed that the recovery of international trade will still take quite a bit of time, he said. 

"We can see that also in June restrictions on Estonia's target markets were among the laxest as far as countries of Europe go," Oja said, pointing out that Sweden, a country which stands out for lax restrictions, is one of Estonia's most important trading partners.

The economist said that where the initial economic impact of the virus mostly affected the service sector, recovery of the economy in general requires that the export sector is put back on its feet, whereas problems on external markets arising from the spread of the virus and related restrictions are holding back the recovery of exports.


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Editor: Helen Wright

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